CHANGE IN PL =
CHANGE IN NATIONAL OUTPUT (GDP, EMPLOYMENT, NATIONAL INCOME)

INVERSE

FOREIGN PURCHASES EFFECT

WEALTH EFFECT

INTEREST RATE EFFECT

CHANGE IN NPD=
CHANGE IN AD

CONSUMER DEBT

REAL WEALTH

CONSUMER EXPECTATIONS

CHANGE IN
AD= PLAQ

CHANGE IN
AD= PLQLSHORT
RUN AGGREGATE SUPPLY

Law of Aggregate Supply

CHANGE
IN PL =
CHANGE IN CHANGE IN NATIONAL OUTPUT (GDP, EMPLOYMENT, NATIONAL INCOME)

DIRECT

CHANGE IN NPD=
CHANGE IN AS

GOVERNMENT

TAXES/SUBSIDIES

EXPECTATIONS

COST OF RESOURCE

CHANGE IN
AS= PLAQ

CHANGE IN
AS= PLAQ

LONG
RUN AGGREGATE SUPPLY

LRAS =
PPF

PERFECTLY INELASTIC; UNRELATED TO
CHANGES IN PL, LIMITS OF POTENTIAL PRODUCTION AT FULL EMPLOYMENT

CHANGE IN NPD=
CHANGE IN LRAS

TRADE

RESOURCES

TECHNOLOGY

CLASSICAL THEORY

JOSEPH SCHUMPETER

Y = C + S

S = I

Y = C + I

CYCLES ARE TEMPORARY DISEQUILIBRIUMS IN

PRODUCT MARKET

RESOURCE MARKET

MONEY MARKET

IF ADTHENS > I

SURPLUS; RECESSION

PRICES DROP

DEFLATION OR DISINFLATION

WAGES DROP

INTEREST RATES DROP

ASAND S = I

IF ADTHENS < I

SHORTAGE; INFLATION

PRICES RISE

INFLATION

WAGES RISE

INTEREST RATES RISE

AS
AND S = I

UNIT SIX
KEYNESIANISM

CRITIQUES OF CLASSICAL THEORY

SAVINGS DOES NOT EQUAL INVESTMENT

RATCHET EFFECT

DOWNWARD INFLEXIBILITY OF PRICES AND
WAGES

KEYNESIAN CONSUMPTION MULTIPLIER

KCM = 1/MPS

NATIONAL INCOME ACCOUNTING

C + Ig + G + Xn = GDP

NY + KCA + IBT = GNP

CONSUMER
PRICE INDEX

NOMINAL = PxQ

REAL = NOMINAL/CPI x 100

MARKET BASKET = HOLD QUANTITY CONSTANT

CPI = MARKET BASKET OF THIS YEAR/MARKET
BASKET OF BASE YEAR x 100

UNEMPLOYMENT

LABOR POOL + NOT COUNTED = POPULATION

UNEMPLOYMENT RATE = UNEMPLOYED/LABOR
POOL

UNEMPLOYMENT:

ACTUAL
FRICTIONAL
CYCLICAL
STRUCTURAL

OKUN'S LAW

CYCLICAL UNEMPLOYMENT x 2.5 = GDP GAP

COST

Aggregate Demand and Equilibrium
A. Equilibrium (E) is where planned and actual AD and AS are
equal.1. Equilibrium is where all goods
produced for sale are sold.
2. At points below equilibrium, AD < AS, inventories are
building and business
activity is contracting. This level of economic activity
was depicted by the
horizontal (Keynesian) range of AS explained in the
previous model.3. At points above equilibrium AD > AS,
inventories are decreasing and
business activity is expanding
as depicted by the intermediate range and eventually the
classical range of AS.4. Economic activity (Real GDP) will be
wherever AD intersects AS.
Equilibrium seldom exists as
economic activity is usuallyin one
stage or another of the business cycle.
B. If economic activity is not in balance, a dynamic situationexists and will continue
until equilibrium is reached.C. Keynes believed that E could settle
at a level of economic activity with large amounts of unemployment.1. If potential Real GDP is greater than
what actual AD yields, a recessionary gap exists and may persist indefinitely. Thesolution to this unacceptable
equilibrium is to increase AD.2. If potential Real GDP is less than
what actual AD yields, an inflationary gap exists and the inflation may persist indefinitely. The
solution to this unacceptable level of economic activity is to decrease AD.